Transparency in VC: Measure What Matters to Improve Coverage and Performance
DDVC #69: Where venture capital and data intersect. Every week.
👋 Hi, I’m Andre and welcome to my weekly newsletter, Data-driven VC. Every Thursday I cover hands-on insights into data-driven innovation in venture capital and connect the dots between the latest research, reviews of novel tools and datasets, deep dives into various VC tech stacks, interviews with experts, and the implications for all stakeholders. Follow along to understand how data-driven approaches change the game, why it matters, and what it means for you.
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VC feedback cycles are long. Very long. It’s an outlier business and returning cash from early-stage investments can easily take a decade or more.
“Once is luck, twice coincidence, but three times is a skill.”
Early-stage venture is hard because you don’t know if you’re any good for long time. Can Limited Partners (LPs) afford to wait decades before committing to a new fund? Can General Partners (GPs) afford to wait decades to promote their junior investors? Of course not. So how can we get more visibility, earlier?
In this post, I’ll share ideas to quantify short-term VC performance. I’ll talk about deal coverage and miss rates across sectors, stages, and geographies; deal conversion rates, cohort performance, and more. It’s an attempt to create more transparency and allow GPs, LPs, and individual team members benchmark themselves and course correct sooner.
What Can VC Firms Learn From Startups
If you ask GPs what their team is doing this quarter, most of them don’t know (although they pretend to). They lack visibility about the resources spent and the balance between new deal sourcing, due diligence, portfolio value creation, fundraising, internal projects, and a lot more. It’s all very qualitative and biased.
Isn’t it ironic that VCs scrutinize startups and drill down each and every metric when investing but they don’t spend a second measuring what matters in their own business?
Imagine a SaaS startup tells you “yeah, we’re doing well and are the best in the market”. Would you accept this and leave them off the hook? Surely not. You’d ask for various KPIs to get a better understanding of the business. ARR, MoM/QoQ/YoY growth, net dollar retention, funnel conversion, burn, you name it (if you’re interested, I contributed to a report on which KPIs matter for companies to raise a growth round here).
On the contrary, when LPs ask GPs about their recent performance and coverage, you’ll most likely hear something like “yeah, we see every startup and have comprehensive coverage”, showing you all the same qualitative logo funnels. And surprisingly, this is accepted and LPs let them off the hook🤯
Why is venture the only industry that gets away with this?
VC has long been a cottage industry that has seen little innovation. This is particularly surprising as VCs themselves are the ones backing the most disruptive businesses. They have a front-row seat when it comes to the adoption of new technologies and business model innovation, yet in the first 60 years following the industry’s inception in the 1950s, the only change was the shift from pen & paper to computer & MS Office.
The reason for this lack of innovation is most likely the absence of competition and pressure to change. Access to capital for startups with less traditional business models and a lack of collaterals has historically been heavily constrained. This is why the VC industry evolved in the first place and, unfortunately, this reality is still true for the majority of new startups today - (source “10 Predictions About the Future of VC”)
While culture and lack of competitive pressure seem like reasonable explanations, it cannot be acceptable and VC as an industry needs to mature. We need to become better. In our own interest to course correct earlier. Distinguish good from bad initiatives. Promote great investors, coach good investors, and let go bad investors.
Measure What Matters
In an attempt to professionalize our own organization, we introduced a range of new metrics at Earlybird several years ago. Since then, we continuously added new and improved existing ones. If we didn’t perceive them valuable, we got rid of old ones.
I’m happy to share some of them below for other VCs to adopt and start benchmarking, to eventually make our industry more efficient, effective, and transparent. And allow LPs to pick the best GPs.